Many Canadians approaching retirement today are facing a risk that seemed unimaginable a decade ago, and that is running out of money and facing bankruptcy. A typical case is a couple in their mid sixties with good jobs, raised their family, own their home, and thought they were set for retirement. Then several things happened. One of them had a stroke which took two years to recover from. Their RRSP GICs rolled over from an 8% rate of return to 2.5%, and their basement flooded which wasn’t covered by insurance. They found themselves deep in debt with no choice but to declare bankruptcy. Forced to sell their home and rent an apartment, they ended up living on monthly government CPP, OAS and Senior’s Benefit cheques.
Many today are in similar situations, carrying mortgages and other debt into retirement with less than $100,000 in savings, thinking that with their monthly government cheques that they will be ok. Sadly, instead of the golden years of retirement, a growing number are going to go bankrupt. According to the Office of the Superintendent of Bankruptcy, 10% of those who declared bankruptcy in 2014 were aged 65 and older, a disturbing 20% increase from 2010. And more seniors are retiring with significant debt. According to Statistics Canada, close to 50% of those aged 65 and over today retire with debt.
There are several reasons for this. Seniors often end up digging into their savings to cover unexpected bills, and sometimes take on more debt in the process. Another reason may actually be a plus; we are living longer, but it means many of us risk outliving our savings. Another factor is today’s low interest rates. This can be a double edged sword for seniors, as on one hand it may encourage them to take on more debt, but on the other, few have enough savings to live on GICs earning 2%.
Paying down debt in senior years on a fixed income can be challenging. Add in unplanned setbacks such as a financially needy adult child, illness or other unexpected expenses and the bills can become overwhelming. It’s easy to underestimate the financial costs of dealing with ill health. For many people under 75, the most common event that derails their financial plans is an unplanned early retirement, often due to ill health.
Rather than waiting until you are retired, take the time to figure out if you can actually afford to. Retiring at 65 without sufficient retirement savings when you may live into your nineties is risky. You may have to keep working, as even part time work will make a big difference in supplementing your savings and government benefits. Figuring out a budget and a best estimate of future living expenses will help to determine if you can retire as planned, or if you need to delay it until you are able.
An increasing number of seniors are looking at reverse mortgages, which uses their home equity as a piggy bank to make ends meet. If you are considering this, I would suggest you first sit down with a trusted financial advisor and check out other options that may have lower fees and offer more flexibility.
There are a lot of sources for information out there. Take the time to figure out your numbers. If you need help with this process, find a trusted financial advisor to work with to develop your retirement plan.
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